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Universal Display Plunged: Should You Join the Market Panic?

Universal Display comes down with a case of lumpy-itis and the market panics. Cooler heads will prevail in the long run.

I told you that Universal Display(Nasdaq: PANL) would shock the Street, didn't I? It just happened to be a downside surprise rather than the positive jolt I had expected.

Shares of the next-generation display and lighting technologist opened 12% lower after reporting first-quarter results. At the peak of the after-hours panic, the stock suffered a 17% haircut. That's not the kind of surprise most investors like to get with their morning coffee.

The reason for this plunge is simple: Universal Display didn't even come close to Wall Street's consensus targets of $0.04 in net income per share on revenue $16.4 million. We shareholders had to settle for a $0.03 loss per share on sales of just $12.6 million.

But wait a minute before you hit that "sell" button. Universal Display is doing much better than this morning's market action would have you believe.

Mind the gap in these GAAP numbersFirst off, some analysts may have banked on license payments from megacustomer Samsung this quarter. Management did warn that these very substantial payments are due in the second and fourth quarters of every year with no impact on the first and third periods, but analysts are still free to model smoothed-out non-GAAP sales if they want to.

So let's run that kind of model as a thought experiment. Half of next quarter's $15 million check would amount to another $7.5 million on the top line. After backing out 20% of that sum to account for South Korean tax payments and pass-on license payments to Universal Display's research partners, you'd see an additional $6 million trickling down to a non-GAAP bottom line. On that heavily adjusted basis, you'd get positive earnings of roughly $0.10 per share.

If you do all of that, you'd also have to reduce next quarter's results by the same amounts that you added to this quarter. These ultra-lumpy GAAP results are full of pitfalls for those who construct quarterly models to estimate what's coming next. It's often better not to play these games at all and just keep your eye on the long-term health of the company.

The word on the StreetThat is indeed what many analysts are doing this morning. Goldman Sachs says you should buy Universal Display on this dip, since the long-term business opportunity far outshines short-term weakness. KeyBanc agrees, expecting catalysts swinging the other way over the summer to repair this temporary damage.

In a fresh note to clients, John Bright of Avondale Partners digs deeper. "We continue to believe upside exists given increasing OLED product launches and the potential for increased production from manufacturers such as LG Display(NYSE: LPL), AU Optronics(NYSE: AUO), and Chimei Innolux," Bright said.

LG is gearing up to produce 55-inch OLED television sets in the back half of 2012 right alongside Samsung. AU aims for smaller screens, hoping to become an alternative supplier in Samsung's enormous shadow to smartphone builders such as Nokia(NYSE: NOK). The Finnish company's flagship phones have sported OLED screens for years, and the hot-selling Lumia 900 is no exception.

Hendi Susanto of Gabelli & Company expressed his disagreement with "the negative market reaction" in a note to clients. The first quarter is the seasonal low point of consumer electronics sales, so there was no reason to believe that revenues would be massive here. The Samsung royalties are beefier than expected, and the projected OLED growth across Universal's major customers adds up to "potential upside exceeding top line guidance." Oh, and there's a 26% short interest hanging over the stock -- a short-squeeze bounce from these super-cheap prices could be brutal to the bears.

Importantly, both Bright and Susanto (and many others) note that Universal Display did not reduce its full-year revenue guidance on these seemingly disappointing first-quarter figures. Not only will $30 million of Samsung's license payments drop in before the year ends, but the consumer electronics market is also notoriously seasonal, with most of the action falling at the back half of the year. Bright says the $90 million floor of 2012 sales guidance "is easily achievable" under conservative estimates, and the upper end of $110 million "could be beat" given the seasonal trends.

Time to take actionI couldn't find a single negative analyst note on Universal Display this morning. We often poke some fun at analysts here at the Fool, but it's still hard to ignore a chorus of professionals all owning up to overestimating this quarter but still sticking to their long-term guns.

It's even harder when I did exactly the same thing myself.

Universal Display doubled its sales from 2009 to 2010 and then again in 2011 -- and guidance still points to a near double in 2012. Other than running the research labs, the company is nearly free of fixed overhead costs, so profits should scale up very quickly as the sales ramp up.